Oil Drops as U.S. Drilling Growth Threatens to Counter OPEC Cuts

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Oil fell as U.S. drilling continues to climb and Libyan crude ports prepare to reopen, undermining the potential for OPEC output curbs to rebalance the market, even if extended into the second half of the year.

Futures dropped as much as 1.9 percent in New York. Energy Minister Khalid Al-Falih said on March 16 that Saudi Arabia may extend its cuts if supplies stay above the five-year average. A day later, though, data showed the U.S. rig count growing for a ninth week and a Libya official said Sunday that the Es Sider and Ras Lanuf ports are preparing to restart oil exports.

U.S. oil this month dipped below $50 a barrel for the first time in 2017 as near-record U.S. stockpiles and rising output weighed on the production reductions by OPEC and its allies.

While the the Organization of Petroleum Exporting Countries won’t decide until May whether to prolong the cuts, ministers including Russia’s Alexander Novak will meet this weekend in Kuwait to discuss the deal’s progress. Money managers cut net-long positions on oil by a record.

“The reopening of the Libyan ports is the reason for today’s drop and the U.S. rig count doesn’t help,” Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by telephone. “The drop in net-length is a signal from speculators that the market is vulnerable.”

West Texas Intermediate for April delivery, which expires Tuesday, fell 67 cents, or 1.4 percent, to $48.11 a barrel at 9:59 a.m. on the New York Mercantile Exchange. The more-actively traded May contract dropped 56 cents to $48.75. Total volume traded was about 14 percent below the 100-day average.

U.S. Rigs

Brent for May settlement declined 42 cents, or 0.8 percent, to $51.34 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a premium of $2.59 to May WTI.

See also: Bullish bets on crude cut by most ever as price falls below $50

Libya’s Es Sider and Ras Lanuf ports will restart shipping oil in one week to 10 days, Jadalla Alaokali, a board member at National Oil Corp., said by phone. The country’s oil output has increased to 646,000 barrels a day from 621,000 on Sunday due to more production from Waha Oil Co., he said.

U.S. drillers boosted the rig count by 14 to 631 last week, data from Baker Hughes showed. They have added 106 machines to fields this year. The nation’s crude output has climbed to 9.1 million barrels a day, the most since February last year, according to the Energy Information Administration. The agency will release data on last week’s inventories and production on Wednesday.

“We’re in a very precarious position ahead of what should be an important report this Wednesday,” Yawger said. “We finally got an inventory drop in last week’s report but that came with a big drop in imports, that may have been temporary. The market can’t take another 2, 3 or 4 million barrel build without breaking it’s back.”

Oil-market news:

  • OPEC and its allies improved their collective compliance with cuts last month as deeper reductions from members offset weaker implementation from other producers, according to two delegates familiar with the conclusions of a meeting in Vienna on Friday.
  • Shale oil production could rise more than expected if oil hits $70 to $80 a barrel, International Energy Agency Executive Director Fatih Birol said in a Bloomberg television interview. Oil demand will also continue to rise this year and in the next few years, he said.

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